Trade easing likely helps Macau casino incumbents: MS

The incumbent casino operators in Macau remain the best placed to continue in the market once the current concession contracts expire in either 2020 or 2022, and some easing of United States-China trade tensions after the recent G20 summit in Argentina could reduce the risk of U.S.-based operators in the Macau market falling foul of geopolitics.

So said a Monday memo from the Morgan Stanley banking group, although it also noted continuation in the market might come at a financial premium.

“Given what appears to be an improving trade relationship between the U.S. and China, we see a greater likelihood the concessions are renewed, at some cost,” said the research document.

“While the Macau concession language notes that the licences must be retendered upon expiry, numerous conversations with Macau-focused lawyers, legislators, and operators have suggested that the incumbents are best positioned to continue to operate, unless the Chinese/Macau governments decide otherwise,” added the Morgan Stanley analysts.

Macau casinos were “highly exposed” to the possible fallout from a U.S.-China trade war, said a business risk assessment report issued in July by Hong Kong-based consultancy Steve Vickers and Associates Ltd.

It emerged on Monday – shortly after the G20 summit that saw U.S. President Donald Trump and China’s President Xi Jinping meet face-to-face – that there would be no new tariffs coming into effect on January 1, 2019 from either the U.S. or China on the respective goods of those countries. Prior to the meeting, it looked possible that new tariffs would come into place in the New Year. But the two nations agreed to a 90-day pause for talks on that topic.

A number of investment analysts covering the Macau casino market had mentioned the trade war as a possible risk to Chinese consumer confidence and therefore to Macau casino gross gaming revenue (GGR) growth for the fourth quarter and into 2019. Several industry executives had also mentioned concerns.

But after the Macau government reported on Saturday that November GGR went up nearly 9 percent year-on-year – ahead of most investor estimates – a note of cautious optimism had emerged in investment circles, although Macau-linked stocks are still heavily down compared to valuations at the same time last year.

Nonetheless Bloomberg reported on Monday that the easing of trade tensions had coincided with a US$325-billion hike in market value to companies in the MSCI Asia Pacific Index of shares.

Morgan Stanley’s Praveen Choudhary, his Hong Kong-based colleague Jeremy An, and U.S.-based analyst Thomas Allen, had said in a Sunday note that some concerns remained about Macau.

They included a slowing in the growth of mass-market casino revenue, a segment seen as being the best prospect for sustainable Macau casino business in coming years, in part thanks to its typically higher margins and being perceived as less problematic politically for Beijing than the VIP segment.

Referring to the November GGR result, Morgan Stanley stated in the Sunday memo: “Despite strength in GGR, it is important to note that adjusted mass revenue growth in the fourth quarter is tracking at less than 10 percent year-on-year, compared to 16 percent year-on-year in the third quarter, and 19 percent year-on-year in the first nine months of 2018.”

The institution also observed the Macau operators had experienced “negative operating leverage”.

Macau reported property EBITDA [earnings before interest, taxation, depreciation and amortisation] and luck-adjusted EBITDA growth of 8 percent and 11 percent year-on-year, respectively, in the third quarter, even though mass revenue grew by more than 16 percent year-on-year. The negative operating leverage could be more pronounced in the fourth quarter, and the first quarter 2019.

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